While making your first home purchase can be intimidating, it does not always have to be. Some may say it isn’t true, but buying a home can be very enjoyable and rewarding.
The first step to buying a home is to always get pre-approved, and the earlier you start, the better. Finding the right Loan Officer (LO) is imperative in order to navigate the complex mortgage process. The best way to find an efficient LO is to have someone refer you to one they have used in the past. There is an overwhelming amount of loan officers who may not be ideal for your situation due to inexperience, so it is vital that you find a seasoned professional who is able to help you.
When beginning the process of buying a home, these are the five most important things you should keep in mind:
1. Start Early – Both saving money and improving one’s credit are made so much easier by having more time available to do so. Starting the process early will allow your LO to work with you to ensure your credit is in the condition it needs to be to acquire the lowest interest rate. Putting more money into the down payment results in more options. Once the process has begun, saving money becomes more streamlined now that there is a goal that can be pursued. It is not uncommon for a client’s family members to give them money toward buying a home. The earlier you start, the more likely it is that family will be able to better manage their finances and have the ability to contribute.
2. Down Payment – Don’t listen to any information that tells you 20% is required to purchase a home. There are a variety of different programs that require less than 5% for a down payment. FHA wants only 3.5% down, Conventional requires 3% down and VA has a 0% down payment. There are other loan programs available for 1% where the lender covers the other 2%. However, don’t fall victim to 1% payment programs, as your interest is sure to increase. For FHA loans, mortgage insurance is required while VA loans never require mortgage insurance. Conventional loans require mortgage insurance if the down payment is less than 20%.
3. Credit Score – Having a respectable credit score is instrumental in securing the best interest rates. An imperfect credit score is not unsalvageable; there are plenty of techniques you can use to boost it. While there are steps you can take to increase it, there is no “magic button” to do so, so be wary of ploys that claim to raise your score a large amount in a short period of time. Time is a consistent factor between all of the techniques used to increase it, and some require more than others. If you are searching tomorrow for a home to buy, it is far too late to worry about your credit score. If you have a few months to work with, you will be a lot better off. Some of the most efficient ways to increase your credit score are to pay down your balance, paying amounts that are past due, and paying off collections or charge offs.
Lowering the utilization-to-limit ratio can help with your credit score as well, and this can be done by calling your creditor and asking for an increased balance. Loan officers are frequently experienced in helping clients raise their credit scores, so they are an option to turn to for advice. Even if the increase is only a few points, you may be able to secure a lower interest rate.
4. Mortgage Insurance – Mortgage insurance is nothing to be afraid of. While it may be frustrating to have to pay monthly for something that may not even be used, it will finally get you out of your parents’ house. Mortgage insurance is required for all FHA loans and Conventional loans if less than 20% is put down. In order to borrow from a lender, mortgage insurance is required, as it protects the lender from potential losses. Similarly, Mortgage insurance on Conventional loans is acquired from insurance companies by lenders in order to protect against a borrower defaulting on their loan. While avoiding mortgage insurance is always a decent way to save some money, the insurance itself should not be a deterrent from purchasing a home. Furthermore, just because you have the money for the 20% down payment does not mean you should pump all of your cash into buying a home. It is always important to plan for contingencies, even if it means putting down 15% and buying mortgage insurance rather than putting down 20%.
5. Loan Officer – The most integral part of the entire home buying process is choosing the right loan officer. Friends are a great primary resource on where to find a good loan officer. Realtors are also able to provide solid recommendations. The biggest mistake that buyers make when dealing with LOs is that they only ask about interest rates and closing costs. Unfortunately, there are many shady loan officers who will initially offer a very low interest rate at first, only to increase it later when the rate becomes locked in.
When searching for a LO, ask them why you should choose their services over someone else’s. Many loan officers are paid commission, so it is imperative to see through the sales pitch they give you and choose an LO who takes the time to work with you. The best LOs are the ones who go out of their way to educate their clients about the home buying process. If they are pushy or don’t promptly return to phone calls or emails, look elsewhere. The most important characteristic to look for in a loan officer is the willingness to communicate with you and invest time in making sure you understand everything about the process. LOs are a big part of purchasing a home and you will be spending a lot of time talking to them, so it is important to choose someone you are comfortable with.